A wind project in South Plains, Texas. Tax equity investing in wind and solar facilities in the U.S. is on track to be between $15 billion and $16 billion in 2020.
Despite hitting a snag earlier in 2020, renewable project and acquisition financing seems to be healthy, with the tax equity market expected to grow by $3 billion over 2019 and capital markets "flush with liquidity," according to investors and developers at the virtual REFF Wall Street, which ran from Sept. 9-10.
"There was certainly a big disruption back in March and April, so we had to be patient," said Bernardo Goarmon, CFO and executive vice president of finance at EDP Renewables North America LLC, speaking on one panel. "Back in March there was a perfect storm, certainly, so what we saw in the capital markets and what we saw in terms of the rush on liquidity was unprecedented." Now, however, "capital doesn't seem to be scarce."
Despite uncertainty in March and April, Invenergy LLC managed to "close a couple of significant transactions" during those months, Meghan Schultz, senior vice president of finance and capital markets at Invenergy, said. "Since then we've continued to be able to raise capital."
"I think unlike the tax equity market where there are some constraints, the commercial debt market does not seem to be constrained," said Schultz, calling it "flush with liquidity."
"The debt markets are wide open," agreed Marshall Salant, global head of alternative energy finance at Citigroup Inc., adding that the constraint is on the tax equity side. "There's huge liquidity in the bond market and the bank loan market and the construction finance market."
Some foreign lenders were spooked from the U.S. market early in the year, according to Salant, but those players are now back. "There was some constraint earlier on where some of the European and the Australian lenders were focused more on their home markets during the height of the COVID uncertainty, but I think most of that's abated now."
Tax equity market on track to shatter 2019 record
Constraints aside, the tax equity market has performed fairly well in 2020 so far. Mit Buchanan, a managing director at JPMorgan Chase & Co., said her banks figured showed renewable tax equity was a $12 billion to $13 billion market in 2019, and projected to swell to $15 billion in 2020. Despite the coronavirus pandemic and slowed economy, the market is currently on track to meet or exceed that figure.
"We are seeing a range of $15 billion to $16 billion, probably need another month to see how things gel and what things ultimately move to 2021," Buchanan added.
Of the tax equity invested in renewables in 2020, 60% is expected to be invested in wind, with the remaining 40% expected to be invested in solar. "I've never seen such a pipeline," Buchanan said.
"We are optimistic about being able to secure capital with reasonable commercial conditions for 2021," said Goarmon, adding that EDP is in the process of inking tax equity deals for 2021.
The tax equity market will likely meet projected targets due to the stability of both the major investors in the market and their regular clientele, with Salant noting that companies like EDP and Invenergy "have no trouble, in general, getting their projects done."
"They can raise their tax equity because of their track record, but for every one of them, there's one or two or even three smaller players," said Salant. "That's where everybody's struggling."
Buchanan agreed, adding, "I'd say that if you look at the segmentation of the tax equity market, the majority of the business is done by, let's say, four or five parties."
Of the investors on the panel, all remain active and focused on wrapping 2020 deals and securing 2021 business.
"We're very much still in the tax equity market," said Jordan Newman, a managing director at Wells Fargo & Co. "Throughout this period in 2020, we've continued to fund existing commitments, write new commitments, and we're still making proposals in inactive term sheet negotiations for 2021 deals going forward."
"There is more uncertainty around tax capacity now than there was in the past," said Newman, whose bank continues to fund existing commitments and write new commitments. "Looking into 2021, we're being more selective than we have been in the past when we're looking at solar ITC deals, and really focusing on working with existing Wells Fargo customers and the highest-quality projects."
Citigroup and JPMorgan Chase also remain active investors.
"We're completely focused right now on three deals that we've already committed to [that] we have to get funded and all closed down for this year," said Salant. "It would be very hard to get a new deal approved today for this year, I don't see that happening. To express surprise on my part, I've been shocked at how many requests we got over the summer from developers looking for tax equity for deals to close in 2020."
Buchanan and Newman agreed that it would be incredibly difficult to take on a new deal that aimed to close by the end of the year.
"We're focused on really executing that 2020 business, and then looking at 2021," said Buchanan. "In terms of the flow of business this year, we've made commitments already for 2020 and 2021. Not a lot of 2021 is fully circled, but we are getting information from our different clients so we can sequence that 2021 business, evaluate it further."
Supply chain hiccups far from fatal
Disruptions in supply chains and meeting deadlines have been an inconvenience to developers and financial backers but not necessarily a significant hindrance.
"While, for the most part, projects seem to be on track, there have been minor delays, but we've been lucky," said Newman. "Everyone is concerned that a delay may manifest at some point and so there's been a lot more pressure on tax equity to have final funding commitment deadlines that are farther out in the future that allow for extension."
"I don't think that deals are taking longer to close" as a result of delays, said Buchanan, though she acknowledged two to three week delays on projects have been common, even if "people make up that time."
"The progress in the field is taking longer," said Goarmon. "So COVID is impacting construction timelines, impacting supply chains. And a project that takes longer to bring to COD, obviously, has an impact on the deals."
The financing space for renewable energy assets is expected to remain busy through the fourth quarter, recreating a familiar year-end rush that typically occurs regardless of the pandemic. "I don't know that it's because of COVID," said Salant. "For the last couple of years, we've always seen a traffic jam in the fourth quarter as people rush to get tax equity deals closed before the end of December."